Who rules from financial services Rules

Thursday 19 June 2014

CFATF executing the FATF rules

On May 29the Caribbean Financial Action Task Force (CFATF) issued a public statement in which it said that it “recognises Guyana as a jurisdiction with significant AML/CFT (anti-money laundering and counter terrorism financing) deficiencies”. That’s fair enough since Guyana is the only Caribbean Community (CARICOM) country that has not adopted AML/CFT legislation and other measures that have been arbitrarily stipulated by the Paris-based Financial Action Task Force (FATF) and supervised by the International Monetary Fund (IMF).

However, in calling on its member-states “to implement further counter measures” against Guyana, CFATF made the absurd statement that it “considers Guyana to be a risk to the international financial system”… absurd because if all the financial transactions and the assets of all the banks in the Caribbean were to be added-up, they would not account for 1% of transactions and assets in the international financial system. Therefore, Guyana, which has no offshore financial sector unlike, for instance, the Bahamas, Cayman Islands, Barbados and the British Virgin Islands, could not possibly account for even 0.1% of the transactions and assets of the international financial system. What possible threat could Guyana, with such a minuscule sum, pose to the international financial system? It is akin to suggesting that a gnat could fall an army of elephants. Nonetheless, the FATF will now tell the world to blacklist Guyana for all financial transactions.

As a former Chairman of CFATF, I see no value in that organisation, which is supposed to be representative of the interests of its member-states, including Guyana, over-exaggerating the effect on the international financial system of small countries that, for whatever reason, are not able to implement all of the onerous requirements of the FATF. The FATF is the hand-maiden of the rich countries of the world with a vested interest in the compliance of all other jurisdictions with onerous and costly rules that are arbitrarily made and that are enforced by measures inconsistent with international law, including countries such as the United States of America (US) extending the enforcement of its own laws into foreign countries. The membership of FATF now consists of 34 countries, including China, Brazil, India and South Africa (CBISA) that it was convenient for the original members to let in given their new economic status. FATF membership is denied developing countries not considered ‘strategically important’.

The rules on matters such as tax competition, money laundering and terrorism financing were made before the CBISA nations joined, but even they have done little or nothing to alter the ‘one-size-fits-all’ approach of the FATF and its sister grouping, the Organisation for Economic Cooperation and Development (OECD) that also has 34 members. Significantly, the CBISA nations found membership of that body to be a step too far if they wished to maintain their ‘developing country’ credentials.

The OECD countries, particularly the US, have used the terrorist events of 9/11 to institute far-reaching measures on countries around the world. While these measures have been pursued in the name of combating laundering of drug-related money and financing of terrorism, there is little doubt that financial institutions in the US and in major financial centres such as Britain have been the principal beneficiaries of the enforcement of rules that push financial services in competing jurisdictions out of business.

In a new and serious development, from July 1 the US Foreign Accounts Tax Compliance Act (FACTA) will compel financial and non-financial entities in foreign jurisdictions, including in the Caribbean, to share information with the American Inland Revenue Service (IRS) on “accounts held by US persons or by foreign entities in which US persons hold substantial ownership interests”. If they fail to do so, the “IRS will cause these correspondent banks to withhold 30% of monies being transmitted to financial institutions outside of the US”. In other words, 30% of all transactions will be withheld whether they involve US persons or not.

Governments in the Caribbean have accepted FACTA and many of them are now adopting legislation to give legitimacy to it as they have done with the FATF rules on AML/CFT. Just as there was little collective action by Caribbean jurisdictions to negotiate compensations for the costs of implementing AML/CFT measures, there has been acquiescence in implementing FACTA even though compliance will add to the already heavy burden on governments and financial institutions.

Of course, every country should co-operate in combatting serious crime but not a cost disproportionate to the risk they pose. The OECD and FATF countries in relation to the AML/CFT measures and the US in relation to FACTA should provide compensation for the high costs that the governments of small countries and their financial institutions face. Their offer of ‘technical assistance’ is grossly inadequate and, usually, means placing their own people into the machinery of other governments, but avoiding the financial resources needed. An authoritative study by the Commonwealth Secretariat (Sharman and Mistry 2008) revealed that costs of ‘the regulatory regime have been rising much faster than any associated tax or fee revenue gain, or the overall growth” of the financial services sector. The Commonwealth study is also explicitl that Tax Information Exchange Agreements that are an integral part of the AML/CFT measures do not compensate small countries “for the expense they must go to in bolstering OECD countries’ tax revenues”.

Guyana’s political parties should adopt the AML/CFT legislation or the country will be blacklisted to its detriment by the FATF. That is the reality of coercive power. For the Guyanese to continue to fight each other is to play someone else’s game by someone else’s rules.

Small countries such as Guyana and the rest of the Caribbean cannot singly resist the bludgeoning of

multilateral organisations like the OECD and FATF, nor can they individually challenge the US. But, they can together make a case for compensation – a case in which they could form alliances with countries, equally affected in other parts of the world, to take the issue as far as the General Assembly of the United Nations if necessary. Right now, the law of the jungle prevails and the mighty rules.

In Guyana the political parties are fighting over the content of AML/CFT legislation, but they are missing the woods for the trees. The real struggle is an international one – and that struggle should also be CFATF’s on behalf of all its member states.